The Insured Retirement Institute has sent a letter to the Securities and Exchange Commission criticizing an agency proposal that the institute said could throw up barriers to clients of RIAs seeking annuities.

The proposed changes, introduced in February, would be made to the agency’s custody rule, also known as the “Safeguarding Advisory Clients Assets” rule.

This rule requires advisors to keep funds with a qualified custodian so that clients have safeguards against the advisor’s insolvency or any possible advisor misappropriation of funds. The sticking point, however, is what a broader rule about who counts as a custodian would mean for annuities under the SEC’s proposed changes.

The proposal would broaden the custody rule beyond client funds and securities to include any client assets an investment advisor has access to or can access. That means, if passed, the changes would require advisors to find a “qualified custodian” to custody client annuities, since insurers don’t meet that definition, according to the IRI, a trade group representing the interests of the annuities industry. The institute warned about the barriers this would pose to annuity clients in a May 8 comment letter to the agency.

As a result of its requirements, the proposed rule “would impair access to annuities, which provide protected lifetime income, thereby frustrating the ability of many investment advisors to provide advice in their clients’ best interests,” the IRI said in a statement.

“These unfortunate outcomes could be avoided entirely through the adoption of an exception to the proposed rule’s qualified custodian requirement that effectively modernizes current SEC guidance,” said the comment letter. That would mean allowing an insurance company “to act in lieu of a qualified custodian in connection with all contract types.” The comment letter was written by Jason Berkowitz, the Insured Retirement Institue’s chief legal and regulatory affairs officer, and Emily C. Micale, its director of federal regulatory affairs.

The two lobbyists said an exception was necessary for insurance companies, which act “like a mutual fund transfer agent with respect to the contract holders’ variable annuity contracts and units of the separate accounts.” That allows insurance companies to protect contract holders’ funds and securities from misappropriation by investment advisors to the same extent mutual fund transfer agents do, said the letter. An exception in the SEC’s proposed rule would allow insurance companies to act in lieu of a qualified custodian when it comes to annuities contracts and would put insurers on an equal footing with the mutual fund industry, the trade group argued.

The SEC’s proposed changes are predicated on the idea that the investment advisor has “custody” of client assets. The proposed definition says that in having “custody,” an advisor or related person directly or indirectly holds client assets or has any authority to obtain possession of them in connection with the services they provide to clients.

But that is not how annuities work, the Insured Retirement Institute said. Instead, insurance companies themselves own the underlying contract assets for the annuities they issue. In addition, insurers and annuities companies are subject to state insurance regulations and several federal regulations to protect consumers.

“The SEC’s acknowledgment of the similarities between insurance companies and mutual fund transfer agents in the custody context necessitates consideration by the SEC as to why the two receive disparate treatment under the proposed rule,” the institute lobbyists wrote.

“IRI believes that it would be appropriate for the SEC to add an explicit exception to the proposed rule that would allow insurance companies to act in lieu of a qualified custodian in connection with contracts,” Berkowitz and Micale said.

Industry trade groups including the Investment Adviser Association (IAA) and the Securities Industry and Financial Markets Association (SIFMA) are asking the SEC to either make substantial changes or withdraw the proposal entirely.

The proposed rule also requires all advisors to significantly ramp up the due diligence of the custodians they select. It also requires, for the first time, that even advisors with discretionary authority use “qualified custodians.”

Under the proposal, advisors must also agree to warn clients in each statement to cross-check their accounts statements with those sent by custodians. Moreover, each advisory firm must agree to submit to annual surprise exams by public accountants who will contact some or all of each firm’s clients, according to the SEC.